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Deal for MI Canada boosts approval chances for Genworth/China Oceanwide merger

The long-awaited sale of Genworth Financial Inc. to China Oceanwide Holdings Group Co. Ltd. may be getting a step closer to completion.

Genworth's agreement to sell its controlling stake in Genworth MI Canada Inc. to Brookfield Business Partners LP is viewed as a positive catalyst to finally bringing the China Oceanwide deal to completion. CFRA's Cathy Seifert said the planned C$2.4 billion divestiture of its MI Canada shares demonstrates Genworth's commitment to the China Oceanwide transaction.

"My sense is that this deal significantly reduces the regulatory risk," Seifert said in an interview. "I think this basically sent a very strong signal that Genworth clearly is committed to moving forward in this transaction."

Genworth in July disclosed plans to seek a sale of its interests in MI Canada because of a lack of "substantive progress" in talks with Canadian regulators about its merger with China Oceanwide. This transaction seems likely to pass muster and should alleviate Canadian regulators' concerns about the China Oceanwide deal, according to analysts.

Brian Suozzo, an analyst at S&P Ratings, said Brookfield Business Partners will not overleverage the business. That is something the Office of the Superintendent of Financial Institutions, Canada's banking regulator, would look upon favorably, he said.

"They're a long-time investor, not someone who is going to buy the business and ultimately flip it," Suozzo said in an interview. "From the information we've been given, it's the kind of company OFSI is looking for."

Jimmy Bhullar, an analyst with J.P. Morgan, said selling MI Canada business would take Canadian regulators out of the picture as far as the Genworth and China Oceanwide deal is concerned. But a few obstacles for that transaction would still remain.

"Genworth's bondholders could try to stop the sale of the MI business," Bhullar said. "Even if the Canada MI sale goes through, the Oceanwide transaction still needs approval from Chinese regulators and Oceanwide needs to come up with the cash. So the sale is a long way from being completed."

Genworth and China Oceanwide recently further extended the deadline for their merger to close to Dec. 31 from Nov. 30. That marked the 12th time the deadline has been pushed back since the deal was announced.

Seifert said a lot can go wrong between now and the end of the year, especially given how long it has taken to close.

"The market still has some, and what I believe to be healthy, skepticism about the transaction closing under its original terms," she said.

Selling its ownership in MI Canada also could help Genworth pay down almost $1.7 billion in senior notes that will mature over the next two years, Moody's analyst Bob Garofalo said in a note.

Because Genworth used 70% of its stake in MI Canada as collateral for a senior secured term loan of US$448 million, proceeds of the sale would first be used to pay down that debt. The rest of the money could be used for all of the debt maturing in 2020 and part of the 2021 maturities, Garofalo said.

"[Genworth] does have liquidity concerns for 2020 and 2021, so bringing in $1.8 billion in cash definitely helps them deal with those upcoming maturities, at least from a liquidity risk standpoint over the next couple of years," S&P's Suozzo added.

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